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July 21, 2010

Demand for Apple Products Supports Plenty of Upside for Apple Shares

Apple reported another great quarter. Below are the "tweets" I posted on Twitter as I as updating my spreadsheet model and listening to the conference call. For Apple, I continue to find that my first impressions are the most valuable so the Twitter comments capture my thinking well.

That said, after reading post call commentary from analysts and journalists, I feel more confident in the outlook and my call for the stock trade well north of $300. Apple needs a decent market to move up another 25-50% but if the market cooperates, I think the stock will make the move. Estimates already jumped over $17.00 for next year and given demand for iPads and iPhones, I think that will prove conservative once we see blowout back to school and especially Christmas sales.

The most important takeaway from this quarter is product demand. Mac laptops and iPhones are really strong and iPad is about to accelerate as supply constraints ease and new countries are rolled out. Apple sold 3 million iPads in the June quarter. It appears they are building to sell 3 million a month now! And iPads were supposed to cannibalize Macs, yet in the first quarter of iPad shipments when Apple fans rushed out to buy the product, Mac laptop sales soared above expectations. It wasn't that long ago when we were talking about the halo effect of iPods on Mac sales. Is it possible that iPads will have a halo effect rather than cannibalize other Apple products?

One final thought. The last few quarters, I find less and less to be surprised about as I input the reported numbers into my spreadsheet. I see this mostly as positive as the risk factors appear to be receding. Also, it reaffirms the still underappreciated operating execution by Apple's management team and employees. However, the Street is finally catching up to the upside potential and that reduces the positive surprise upside from the earnings figures. The shock factor is less. This slightly hurts the stock in the short-term though the next 6 months look great.

Here are my Tweets from yesterday afternoon:

• 1st Impressions off spreadsheets. Another Gr8 Q. Gross Mgn a bit less than I thought. iPads? Gross mgn guidance looks way low at 29%.

• So much for Macs being cannibalized. Macs very strong with laptops driving it.

• gross mgn guidance seems to be 34.4% vs. 39.1% last Q. Must assume lots of back to school iPads and new country iPads at lower mgn.

• FY10 heading to $14.50. At 20% growth FY11 goes to $17.40. Current consensus is 20% growth. Cash now $50 a share. $65 in one yr

• FY11 at $17.40. Cash in 1 year at $65. $260 - $65 is $195 or 11.2 P/E. Cheap. At 15 P/E plus cash, target of $325. Up 25% from here.

• 20% growth in FY11 is massive deceleration from current trailing 12 month growth of over 50%. Justifies $17 plus in FY11 EPS.

• Not getting much new info beyond initial impression on $AAPL conference call. One Q on iPad cannibalizing iPod touch hits home for me.

Disclosure: Apple is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. Steve Birenberg is sole proprietor of Northlake Capital Management, an SEC registered investment adviser.

Posted by Steve Birenberg at July 21, 2010 08:58 AM in AAPL